Japan’s Katayama says expect BoJ to conduct appropriate monetary policy to achieve 2% price target

Japanese Finance Minister Satsuki Katayama stated on Thursday that the government will review budget requests and control debt issuance to ensure market credibility. She also expects the Bank of Japan (BoJ) to conduct appropriate monetary policy to achieve a stable, sustainable 2% inflation target. Katayama mentioned that the government has pledged to address excessive volatility, which was evident when Japan-US joint intervention was launched.

No comment was made on the BoJ's policy at the time. The USD/JPY pair experienced a slight decline of 0.10% on the day, trading at 156.10. The Bank of Japan, the country's central bank, is responsible for setting monetary policy and ensuring price stability through controlling inflation, ideally around 2%. The BoJ initiated an ultra-loose monetary policy in 2013 to stimulate the economy and fuel inflation in a low-inflationary environment.

This policy involved quantitative and qualitative easing (QQE), which included printing money to purchase assets like government and corporate bonds to provide liquidity. In 2016, the bank further loosened policy by introducing negative interest rates and directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, marking a retreat from its ultra-loose monetary policy stance.

The bank's extensive stimulus led to the yen depreciating against its main currency counterparts, exacerbating the trend in 2022 and 2023 due to increasing policy divergence between the BoJ and other central banks that opted to raise interest rates sharply to combat decades-high inflation. This divergence partly reversed in 2024 when the BoJ abandoned its ultra-loose policy stance.

The weaker yen and rising global energy prices contributed to increased Japanese inflation, surpassing the BoJ's 2% target. Additionally, the prospect of rising salaries in Japan, a key driver of inflation, also played a role. Lallalit Srijandorn, a Parisian at heart, lives in France and now pursues a digital entrepreneurship career in both Paris and Bangkok.

The USD/JPY pair has recently recovered, moving away from a brief dip below 156.00 and approaching a near two-week high observed the previous day. This recovery is attributed to a more hawkish reassessment of the BoJ's policy normalization path, which provides support to the Japanese Yen. The upside potential for the pair remains limited, with the focus now shifting to the BoJ's policy decision scheduled for Friday.

Gold has faced fresh sellers above $4,300, stalling its recovery from six-week lows reached following hawkish US Federal Reserve monetary policy announcements. Japan's ultra-low interest rates helped fund trillions of dollars in global investments for over a decade, rendering the Japanese Yen one of the world's cheapest sources of funding.

With the Bank of Japan anticipated to tighten policy again this week, that advantage might be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.